Daniel Borenstein: Oakland pension plan irresponsible, morally wrong

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Oakland City Councilwoman Libby Schaaf checks her calendar in her City Hall office on Friday, April 29, 2011 in Oakland, Calif. Schaaf, an Oakland native, is serving her first term on the council. (Jane Tyska/Staff)

Displaying amazing fiscal irresponsibility, the Oakland City Council will ask voters in November to once again stretch out payment of a half-billion dollar debt to a pension plan currently serving about 1,155 retired police and firefighters hired before 1976.

City taxpayers, especially property owners, should be outraged. Pension systems are supposed to be pre-funded. That means sufficient money should be set aside and invested when workers are on the job to ensure that there are enough funds later to cover retirement payments.

But that’s not what has happened in the 60-year saga of the Police and Fire Retirement System. The pension plan, created in 1951, was closed to new members in 1976 after it was found to be badly underfunded.

Since 1981, property owners have paid an exorbitant extra tax to help reduce the shortfall they inherited. The surcharge currently costs $419 a year for an average home assessed at $266,267, and $1,575 annually for a $1 million house.

In exchange, voters were promised the pension plan would be fully funded by 2016. That was later extended to 2026. Now, the City Council, after years of mismanaging the funds, wants voters to allow future extensions to whatever dates an actuary blesses.

That means the deadline probably will be immediately extended a few years, and then likely pushed back again in the future. The notion that an actuary will approve the extensions should not mislead voters into thinking this is a responsible way to manage city finances. That’s not the actuary’s concern. What he or she cares about is that the pension plan doesn’t run out of money to pay retirees.

Oakland officials like the proposal because otherwise they need to make large payments now to the pension plan on top of the money raised from the special property tax. By extending the payoff date, by pushing the costs further into the future, they reduce the current payments.

Unfortunately, Oakland is a city that lacks advance budget planning. That’s why the pension payments present such a problem this year. City officials have known about them for more than a decade and have done nothing to plan for them.

Nevertheless, the extension might have been an acceptable last resort if the ballot measure did not leave the final payment date open-ended and if there was a binding and fiscally responsible plan for meeting that deadline. But there is none.

Indeed, Mayor Jean Quan, City Council members and city staff have yet to present any comprehensive workout plan for the city’s huge mounting debt, which extends beyond just this pension system and threatens the municipality’s fiscal solvency.

Instead, the ballot measure would ensure another future crisis. While the proposal would postpone the payoff date, it would not extend the special property tax assessment, which expires in 2026. That raises the question of what the city will do in 2027, when it has large pension payments and no special property tax revenue to help cover them.

Meanwhile, the ballot proposal turns pension-funding fundamentals upside down. Councilwoman Libby Schaaf, who proposed the extension, has essentially discarded the notion of pre-funding pensions, and instead suggests making payments into the retirement system only as they are needed to fund pension payments.

All but one of the members of the pension system have retired. The average age of the surviving retirees and their beneficiaries is about 75. That means some of them could be collecting benefits through 2050.

So Schaaf argued in a report to the council last month, that “front-loading of the city’s payment obligations to the retirement system … may not be fiscally necessary.”

The comment, however well-intentioned, displays a stunning misunderstanding of a key principle of pension financing. Pre-paying pensions is not “front-loading,” as Schaaf claims. It’s properly paying for benefits when they are earned.

Keep in mind that pensions are just one form of compensation for labor. No one would suggest taking out a loan to cover salaries or health insurance premiums. Pensions are no different. The costs should be fully funded when the labor is performed, not foisted onto future generations.

But that’s what has happened with this small, and incredibly costly, pension plan. Our children and grandchildren will be paying the tab for labor provided more than a half-century earlier. Now city officials want to push the problem even further down the road. It’s morally wrong.

Dan Borenstein is an award-winning columnist for the Bay Area News Group and editorial page editor of the East Bay Times. He has worked for the Times and its affiliated newspapers since 1980, including previous assignments as political editor, Sacramento bureau editor, projects editor and assistant metro editor. A Bay Area native, he holds master’s degrees in public policy and journalism from University of California, Berkeley.